Do you let your preconceptions and biases of things in the financial world influence your financial decisions? Chances are, it happens without you even realizing it.
For that reason, I thought it would be helpful to compile a list of some of the most common biases that can hinder investors from reaching their fullest financial potential. Being aware of such habits is the first key to changing your ways and becoming less biased–and hopefully more profitable–as a result.
- Fear of Risk
Do you have trouble taking any risk with your investments because of fear that you’ll lose it all? It’s true less risk in your portfolio is a better move as you near retirement. But a certain level of risk–especially during your younger years–is necessary to realize significant gains when the equity markets soar. If you think about how much money you’re potentially leaving on the table due to your resistance to risk, it may cause you to reevaluate your fear.
- Following the crowd
The tendency of investing in something just because everyone else appears to be is a another common investing bias. It’s important to realize that just because may seem the majority of other investors are buying or selling certain equities doesn’t mean you should follow suit. This tendency is known to cause many investors to buy high and sell low, simply because they are following a crowd mentality. Instead of trying to time the market by following the crowd and realizing mediocre returns, talk with a financial professional about coming up with some investing strategies that are tailored to your situation.
- Dwelling on the latest market news
The news channels have constant streams of up-to-date financial news that is hard to ignore. How much do let it affect the way you invest? If the market has been consistently up or down, it may be easy to forget what happened a few years back. Instead of letting only the latest information influence the way you invest, however it’s important to also examine the trends of the past so you can get the whole picture. Failing to look at the market in its entirety may cause you to subconsciously dismiss an approaching bear (or bull) market.
- Putting emphasis on results rather than quality of investment choices
Next time you get a great return, don’t solely focus on that profit. Instead, evaluate what about that particular decision made it a good one. The truth is, hardly any of the investment decisions we make have a predictable outcome. Therefore, resist the urge to value the profit from a decision over the wisdom of the decision. The decisions with the best outcomes aren’t necessarily the best decisions.
Bottom line: Hopefully these four common biases will help you reexamine your tendencies and consider changing the way you invest. Look past your preconceptions and see if it makes a difference in your investing results. I feel confident it just might.
